I’m finally back at it after welcoming my sweet little baby Abigail! I’m kicking off a series of blog posts on your business’ chart of accounts, which helps you categorize your assets, liabilities, equity, income and expenses. Today we’ll be focusing on your income, specifically livestock sales.
So let me ask you… Is your Chart of Accounts serving your business?
Go ahead. Think about it.
If you’re scratching your head, I’m going to go out on a limb and say probably not. Thankfully I have a way to help you.
Regardless of who initially created your chart of accounts- your accountant, bookkeeper, husband, wife, daughter, son…. you need to sit down a take a good look at it. If a chart of accounts is created solely for accounting or banking, it will not necessarily benefit your daily business. There. I said it. Not exactly a popular opinion.
So how can you ensure that your chart of accounts is serving your business?
Throughout this series, we’ll walk through the most common accounts and I’ll explain how to customize them for YOUR business. The examples we’ll walk through are intended for Farmers, Ranchers and Agribusiness Owners, but I think that any business can relate with the general guidelines. When we are done with this series, you will be able to make custom reports for your business that will give you the most insight into your profitability as well as cash flow and net worth.
I’m so excited about this, so let’s just get started!
Your accountant would (generally) tell you that your chart of accounts should have TWO accounts for sale of livestock. Purchased Livestock and Raised Livestock. Yep, that’s it. And the reason is so that your accountant knows if you need to pay capital gains tax on a purchased animal which you later sold. It really doesn’t have to do with what YOU need to know to manage your operation. So all of the work you are putting in to your herd to raise the best cows, the healthiest calves, etc is not properly reflected on any reports you are to run.
For the most part, in our example, I would agree with having one Purchased account. So it would look something like Income:Sales:Purchased Livestock. You might consider having multiple accounts if you purchase your replacement heifers or if you are interested in finding out which bulls have the best market value when you are through with them. Just a few things to think about. A lot of it has to do with how detailed of bookkeeping and reports you want to utilize and are willing to maintain, either yourself or via an employee or a bookkeeper.
However, your Raised Livestock account, in my opinion, should be better customized to your business. Any farmer or rancher (or business person, at that) can tell you there are thousands of different decisions you can make in your operation, and sometimes you need to see the data to know if a decision was the right one. For simplicity’s sake, let’s say you have two herds of cows, of equal size. You decide to use two different weaning strategies for each herd and want to determine which method is more profitable.
After weaning, you market your calves and sell them. You want to create two different accounts on your chart of accounts to categorize the transactions. The first is Sales:Raised Livestock:Calves Weaned with X Program. The second would be Sales:Raised Livestock:Calves Weaned with Y Program. Now when you run a Profit & Loss statement, you can clearly see which set of calves made more money. We will continue to use this example next week and will determine your individual expense accounts, knowing that JUST income can’t indicate your true profit on these calves. My preferred accounting program is QuickBooks Online for its flexibility and mobility. Seriously, you can use it anywhere! No more being tied to a desk. One of the biggest reasons why I believe QuickBooks Online is ideal for farmers, ranchers and agribusiness owners. But we’ll have to chat about that another time. If you would like to transfer your books to QuickBooks Online from another accounting software program or even from your paper books, just let me know. I can help you snag the first two months for free!
Keep in mind if you want your chart of accounts to serve your operation, you need to follow through with this concept. If you intend on utilizing sub-accounts, you will need to ensure that your transactions are categorized to the lowest level of the sub-accounts. If you have a transaction that doesn’t fit into a lowest level sub-account, then create one that does.
With these changes, you are well on your way to running reports that will reflect your specific management decisions. Your accountant can still easily find the information they need, using the less detailed accounts. You will be so amazed by the detail-oriented reports you can run if you just use your chart of accounts to your advantage!
If you aren’t even sure what changes to make or where to start, that’s where your bookkeeper comes in. If you don’t have a good bookkeeper, give me a shout! I’d love to offer you a free no-obligation bookkeeping consultation.
If you have any other topics you’d like for me to touch on, just drop me a comment!
Thanks so much for stopping by! Happy bookkeeping.
– Michelle